Prestige University Grants Degrees Only to High Skill Students Who

question 22

Essay

Prestige University grants degrees only to high skill students who perform well for their eventual employers. Mediocre University grants degrees only to low skill students. The market demand for newly graduated high skilled workers is: The market demand for newly graduated low skilled workers is: Currently, Prestige University graduates 1,000 students while Mediocre University graduates 5,000. Determine the equilibrium prices for low and high skilled graduates. Suppose that in an effort to cut costs, the State has merged Prestige University and Mediocre University into State University. This merger has eliminated the signal that employers use to rely on to discern graduate quality. As a result, the demand for State University graduates is: The number of graduates from State University will be 6,000. Calculate the equilibrium price for State University graduates. Before the merger, would students at both Universities be willing to pay higher tuition in an effort to prevent the Universities from merging? Why or why not?

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Definitions:

Cost of Goods Sold

The direct costs attributable to the production of the goods sold in a company, including both materials and labor costs.

Absorption Costing Income Statement

An income statement where all manufacturing costs, both variable and fixed, are treated as product costs, with non-manufacturing costs treated as period costs.

Variable and Fixed Costs

Variable costs change based on production levels, while fixed costs remain constant regardless of production volume.

Fixed Factory Overhead Costs

Expenses related to the operation of a manufacturing facility that remain constant regardless of the production volume.